The Breakdown - Alyse Killeen on Why Bitcoin Was Ready for Nation-State Adoption

Episode Date: November 27, 2021

This episode is sponsored by NYDIG. On the final part of his three-part miniseries “Gratitude for Bitcoin,” NLW is joined by Stillmark’s Alyse Killeen, a venture capitalist focused entirely on the bitcoin ecosystem. Alyse explains how remarkable it was that bitcoin was ready for nationwide adoption in El Salvador and gives a preview on what she thinks is coming to the network in 2022.  Find Alyse Killeen on Twitter: @AlyseKilleen NYDIG, the institutional-grade platform for bitcoin, is making it possible for thousands of banks who have trusted relationships with hundreds of millions of customers, to offer Bitcoin. Learn more at NYDIG.com/NLW. Enjoying this content?   SUBSCRIBE to the Podcast Apple:  https://podcasts.apple.com/podcast/id1438693620?at=1000lSDb Spotify: https://open.spotify.com/show/538vuul1PuorUDwgkC8JWF?si=ddSvD-HST2e_E7wgxcjtfQ Google: https://podcasts.google.com/feed/aHR0cHM6Ly9ubHdjcnlwdG8ubGlic3luLmNvbS9yc3M=   Join the discussion: https://discord.gg/VrKRrfKCz8   Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW “The Breakdown” is written, produced by and features Nathaniel Whittemore aka NLW, with editing by Rob Mitchell, research by Scott Hill and additional production support by Eleanor Pahl. Adam B. Levine is our executive producer and our theme music is “Countdown” by Neon Beach. The music you heard today behind our sponsor is “Dark Crazed Cap” by Isaac Joel. Image credit: Iryna Ustenko/iStock/Getty Images Plus, modified by CoinDesk.

Over 3 million Salvadorans are using Bitcoin via Lightning Network. And what that means is that Lightning Network is banking more people in El Salvador than the local banks are in aggregate. That's incredibly powerful. And, you know, if Bitcoin were to only do that, I think it would be enough. But of course, we know this is just a starting point for Bitcoin. Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by Nidig and produced and distributed by CoinDes.

What's going on, guys? It is Saturday, November 27th, and today we have our third indie gratitude for Bitcoin mini-series, our final chapter. We had Dylan Leclair and Dan Held, and we are rounding it out with Elise Killeen. Elise is a Bitcoin-focused VC and has been in this space for much longer than most people. She focuses entirely on the Bitcoin ecosystem with her firm Stillmark. Elise is one of the best people to understand what's really happening in the ecosystem around Bitcoin from both a technical and an entrepreneurial perspective. So let's get into the conversation right now. All right, Elise, welcome back to the breakdown. It's great to have you here. It's so good to see you.

It's been too long. How have you been? I have been well and been busy because Bitcoin never sleeps. And this has been quite a busy period. So that's been reflected in our own work. Yeah, I bet. It's been crazy. I mean, I talked to you, I think last on the show at least, right as we were leaning into kind of the, I don't know if we had breached 20,000. I think we might not have. I think we were lurking around there, but we hadn't quite gotten there yet. So obviously it's been a lot of milestones, a lot of changes, and a lot of crazy things this year since we last caught up. That's incredible.

Thank you for reminding me of that. And I forgot. To me, it feels like it's been, you know, at 60K forever. So, or at least for the past couple of years, we're bored of this number now. But yes, 20K. That's a long time ago. I know, right? And it was such a shining star on a hill for so long, too.

But I guess let's start. For people who aren't familiar with your work, you're a lot. you're a venture capitalist but focused on the Bitcoin ecosystem. And obviously, the people are familiar with crypto VCs, but let's talk a little bit about like kind of what types of things you have been interested in, are interested in, you know, what it looks like to be a Bitcoin-focused VC. So Stillmark is just backing the top tier of Bitcoin founders, Bitcoin and Lightning founders. And that follows about almost a decade of prior work in venture.

And so the reason to focus on Bitcoin is because it's, well, there's a few reasons. One, it's a way to do well while doing good in the world. And two, I think that the value being created by Bitcoin founders is uniquely sustainable or has the opportunity to be uniquely sustainable because the underlying technologies are sort of built for that. And given where Bitcoin's at now, what it means practically to be a Bitcoin VC is that we're doing a lot of investments around the financialization of the space payments, companies that will integrate payments and want freer, fair, more instant payments. So that can be companies,

you know, gaming, different earning dynamics, peer to peer payments on social media, stuff like that. And then just some of the, you know, the bricks and building a new financial system around Bitcoin. That's our world. Super cool. And so I mean, obviously people have been spending a lot of this year asking how Bitcoin has changed or maybe marveling at how quickly things have changed and it feels like we've progressed to a new level. You have an interesting lens on that though because you're actively funding what the right thing is. If you had been funding some of this payments infrastructure for corporates or thinking about like the things that you're funding now, I imagine, look pretty different than what you might have been interested in a

couple years ago. How have you seen that shift in where your priorities are from a, from a funding perspective, you know, kind of manifest over the course of the year. So our priority is to first understand what's happening on the core protocols. So what's happening on Bitcoin Core, what's happening on Lightning Network, and also to look ahead. So to have as much for knowledge of what's coming on the core protocols as we can and then match that to what will then be possible for companies, apps and infrastructure built on top. And so our work is dynamic as Rosal. of that. So whereas payments wouldn't have made sense to focus on ahead of Segwit, activating,

and seeing adoption, it does make sense now. And the ramifications of that are that there's companies really ready to go to support, for instance, emerging markets coming online to Bitcoin, that of course are going to do so through lightning versus through Bitcoin, the Bitcoin blockchain directly. And so, you know, it's our work to understand what the open source development, are doing and what the repercussions and opportunities of that are for founders. So I want to ask you, there's a lot of stuff that's like very, very recent and pertinent that I wanted to ask you about. But because I haven't had a chance to have you on for a while, I want to zoom back in the year a little bit actually too. And first, I want to get your take on

everything that happened with China. I guess I'd love to know, you know, so I feel like the kind of dominant attitude or the perspective that a lot of us had when China started blessed again was we've seen this before, you know, it's kind of more of the same. But then obviously their move to kind of push Bitcoin out of the ecosystem has been a lot stronger than we thought. What has been your perception of that, you know, and I guess, you know, both then and now as it's evolved? Well, I mean, I think that what China's actions were foreseeable and predictable and not something that, you know, anyone that was paying attention didn't expect. So we we thought that this would happen. And in fact, having it happen and taking the risk or uncertainty

out of whether it would or not is positive for the ecosystem, at least in the short or midterm. Beyond that, of course, I'm excited about anything that encourages any type of stress or whether positive or negative that encourages greater decentralization, including around geographic diversification of where mining is centered. And the immediate impact, impact of that, I think, was probably quite positive for mining decentralization and thus for the industry. All of that said, of course, we want folks to have access to participate in Bitcoin however they choose. And when a state shuts that down, then I have incredible empathy for that. And so, you know, I don't want to overlook the fact that that was, you know, a really unfortunate event. And I hope, of course, that it will be reversed in the future.

Yeah, I think I think it's a really salient point that, you know, I think many people are coming to the same conclusion as you. We've seen really positive impact as hash rate has been reorganized. I think people forget that for a long time when you said China fud, what you meant was China capturing the network in somehow because of minor concentration or something else. and this has largely eliminated that, but it still does mean whatever it is, you know, a billion plus people are cut off from the network, at least cut off to easy access and kind of, you know, legal and abided access to the network, which is, which sucks, you know, for that group.

Right, yes, it does. And of course, right, so really what they're cut off from is any sort of public display of participation, which would include easy on and off ramps locally, on and off ramps that are easily accessible participation through mining or any sort of physical demonstration of it. And, you know, I expect that we'll, I hope and expect that we'll see that reversed. And all of that said, I don't think that it was a negative in the short term for Bitcoin. Yep. Yep. Completely agree. So when that happened, one of the immediate lines of

questions that people had was, okay, so what does this say about the U.S.'s treatment of Bitcoin then from a regulation standpoint? You had some who were, you know, tended to be outside of Bitcoin who were kind of pointing to this and saying that's what's going to happen here. But then you had others who are saying, well, wait a second, doesn't this actually represent, you know, from a pure kind of real politic geopolitical perspective, an even stronger opportunity? You know, the regulatory conversation around crypto in general and Bitcoin specifically has been interesting this year. And I'd love your take on, you know, did it play out in ways that surprised you or kind of that affirmed what you had, you know, that you previously thought, particularly with regard to the infrastructure bill and

other conversations that are active now? Right. Well, that's a complex question. So what I'm bullish about is seeing regulators and folks in, you know, participatory in government at any level, including city, state, federal. I'm excited that I see people understanding the categorical difference that exists between Bitcoin and other cryptocurrencies and understanding, you know, sort of what's definitional to Bitcoin and how that's just, like I said, categorically different from other cryptocurrencies. And so I expect that that will continue to advance because it's demonstrable. You can observe the way that Bitcoin grows and moves, as well as other protocols, and see that they are different things.

I think that 2021 was a period in which folks in regulators and folks in government acknowledged that they were different. And so for that, I'm bullish. I'm also excited to see that there's a recognition that your city, your state, your country can benefit by being an early participant in Bitcoin. and to see folks begin to, you know, be able to lead at a city level like what's happening in Miami or at a country level like what's happening in El Salvador, that is really incredibly exciting for me.

And beyond that, the fact that Bitcoin's ready for it, I mean that from a protocol perspective and in terms of the app and infrastructure developed in order to support a country like El Salvador coming on board to Bitcoin. You know, I think it shows that it really shows the good work of people all across the stack. Everyone from Bitcoin Core to Lightning Network, core development, or open source development, and the app developers, I think, have put Bitcoin in a place that it's ready to be recognized as different and additive to populations from, whether that be Miami, El Salvador

or beyond. NIDIG sponsors this podcast and they're integrating Bitcoin into everyday life. not only for Wall Street, but also for Main Street, because NIDIG is built for Bitcoin, and Bitcoin is built for everyone. Learn more at Nidig.com slash NLW. That's N-D-I-G.com forward slash NLW. Let's actually turn to El Salvador, because this is obviously one of the biggest things to happen this year and something that I really wanted your take on as well.

You know, I guess first, take us back to when you first heard about this. You know, was this something, your job is kind of devolved. view pretty far out. But would you have had, you know, sovereign adoption of Bitcoin on your bingo card for 2021? You know, I didn't. And I think that we have a view that's very far, you know, forward looking, but bitcoins as a community tend to be realist and to sort of be practical on their expectations of timeline. And so that applies to Stilmark as well. I did not think that there would be that level of adoption for Bitcoin this year. And I'm incredibly excited that I was wrong or, you know, not as bullish as I should have been in my expectations for that. And then, you know,

as I said just a moment ago, the most important thing was that Bitcoin was ready for it. So we were able to say, you know, the community was able to say, this is a value that we can provide in El Salvador. And then to be able to back it up and fulfill it was really just incredibly exciting to see. And the fact that it's happening in emerging markets, though, that was something that we were pretty certain on and that I'm excited to see, you know, a hypothesis proved nonetheless. That's because my hope is that the people in El Salvador will have an early advantage by being early adopters. And, you know, there's a lot of people in El Salvador working hard to make sure that that happens. So let's talk. I mean, obviously, you know, it's still really fresh. It's still really

new. I mean, I think I guess in month four of Bitcoin being legal tender in El Salvador, what have you seen, you know, from your perspective around sort of positive feedbacks loop being created around Bitcoin, more development work around Lightning, you know, like, you know, I think that you're, the fact that it is up and running validates your point about Bitcoin being ready. But what are the sort of the set of impact? that we're seeing on Bitcoin on the Lightning Network because of needing to kind of take on this huge nation-state level project. Well, so to start at the bottom level, what was exciting to see was that there was

entrepreneurial eagerness and a willingness to take on the risk that is helping El Salvador adopt Bitcoin. So to rewind four months ago, September 9th, 7th, something like this, this was the first date that Bitcoin was adopted as legal tender in El Salvador. And in the months leading up to that, I think there was a lot of pessimism about the experience that Salvadorans would have in using Bitcoin and using lightning. However, our concerns were swayed, and we saw that local entrepreneurs sort of rose to the occasion in order to provide the tools and infrastructure.

So I'm talking about node management and channel management to allow for there to be a really positive experience of Bitcoin at the start. And so, and to mention a local company, so there's been a lot of talk, of course, about Galois going local to El Salvador, a lot of talk about the folks in Bitcoin Beach that generated sort of the momentum for Bitcoin in El Salvador. There's a company coming from a neighboring country, Guatemala, called IBEX Mercado, that was very contributory into both the government's ability to provide nodes and channels that supported the activity, Bitcoin activity from Chiba Wallet, but also were able to onboard merchants in a seamless way. And so to see sort of, you know, like a grassroots entrepreneurial-driven movement

that was considered of the experience of new Bitcoiners in El Salvador was incredibly exciting. Now, to go beyond that and look at the high level down, we know that it's been reported that over three million Salvadorans are using Bitcoin via Lightning Network. And what that means is that Lightning Network is banking more people in El Salvador than the local banks are in aggregate. That's incredibly powerful. And, you know, if Bitcoin were to only do that, I think it would be enough. But of course, we know this is just a starting point for Bitcoin.

And so there's countries ready to be second mover, both locally in Central America and Latin America more broadly, as well as in countries across oceans. And so it's, you know, to be first mover is hard. The fact that they were first mover with good early success is bullish. And my hope and expectation is that the second movers will be able to learn from best practices established in all south. door. Yeah, it's awesome to see. I think I was I was actually talking about it on a show recently. I was kind of doing just like an update because I hadn't covered, you know, what had been going on since then. And the broad read, I haven't had a chance to be down there, but the broad read of, you know, all of any technical challenges and things like that are basically like well within the band of what you would expect in putting an entire nation on a new technical standard all at once very quickly. You know, it's like the fact that there haven't been just screaming huge issues is actually kind of reflective of how successful it's been in some ways that I think it's hard for people to appreciate in the short term, you know?

It's absolutely incredible. And so it was, it far exceeded the execution of this has far exceeded, I think, most people's expectations, including my own. And that is due in large part to very local, central American based. talent, entrepreneurial talent, and Bitcoiners that took it upon themselves to make sure that folks newly onboarding were going to have a good experience. It's really incredible to see. So I want to shift to another topic that has been in the discourse around Bitcoin recently, but that I feel like it's been hard for me at least to pin down a little bit. So this is Taproot. And obviously, you know, one of the things that makes Bitcoin a little bit different is major upgrades aren't, aren't sort of marketed. It's not the way that it operates. And so I guess what I'm interested in is first your kind of take on the significance of Taproot. And then second, as sort of another part of the question is, you know, part of the chatter has been this is a step towards Defi on Bitcoin or whatever that means, right? So I guess what is TapRood to you and where does it fit with this notion of

Bitcoin defy? Right. So Bitcoin is decentralized finance, right? So Bitcoin is defy in and of itself, nothing extra needed in that, frankly, for many people, including the people in El Salvador, onboarding to Bitcoin represents their first access to a global economy. You know, it's incredibly significant. Taproot does advance that. So Taproot creates efficiencies in transacting on Bitcoin core, it creates greater privacy, and the ramifications of some of that are that it creates the potential for more sophisticated smart contracting on lightning and on layer twos. And my expectation is both because of the sort of entrepreneurial activity that exists in with Stillmerks pipeline and from conversations with developers building lightning.

So open source lightning across implementations is that, you know, that will see the repercussions, the positive repercussions and opportunities of Taproot as early as 2022. And a lot of that will be relevant to the prior subject we discussed, which is emerging markets onboarding to Bitcoin through lightning. And so an example of this is that Taproot sets the stage for us to be able to exchange stable coins or to make payments on lightning in a way that those payments are denominated in a local fiat currency. And that's quite important because the ability to tolerate volatility is variable. So our ability to tolerate or be excited about and gain from volatility in developed nations

or in wealthy populations is different for many folks, not all, many folks in emerging markets. And so we want Bitcoin to be able to be, you know, providing a, checking account experience, as well as a saving account experience. And so to do that, I think that you allow people to, of course you do, because Bitcoin's open and permissionless, you allow and encourage people to participate in Bitcoin and have exposure to the volatility in their savings account. And then in what they need for monthly or quarterly spending, perhaps that should be denominated in a way where it matches with their monetary needs and

risks that they themselves are exposed to in that period. And that looks a lot like being able to hold a stable coin or a stable channel via lightning. Taproot is one of the pieces that gets us there. Super, super interesting. I like that framework of that kind of real world framework. Because I think that, you know, I mean, even the fact that kind of the way that you define things at the beginning, this conversation gets very fraught with analogy to other things very quickly versus sort of what functionality in the real world this enables? Right. Exactly right. And Bitcoin doesn't exist in a bubble. And we're operating in a broader ecosystem of cryptocurrencies and protocols that overpromise and under-deliver and do so without any sort of anxiety around that dynamic. And Bitcoiners are all the

way on the opposite end of the spectrum and that we want to undersell and then demonstrate what Bitcoin can do. And I understand and really appreciate the culture of that. But I hope that it doesn't mean that we, you know, sort of have our heads in the sand in terms of the significance of taproot. Another element of taproot that was significant is the way that it was activated. And this is because the major upgrade prior was Segwit, which of course was quite contentious and disruptive to the community and to builders. that was not the case for Taproot. And so it was, you know, exciting to be able to make such a significant change while having, you know, most folks on board with it.

I agree. It was fun watching that, you know, you had all of these calendars spring up and, you know, people kind of watching the signaling. And it was a nice, it was a nice moment, especially, as you mentioned, compared to the last major upgrade and the contention around that. Alisa, as we round out here, you obviously, have to spend a lot of time thinking about what people are building and what comes next. What are some of the themes that you're most excited for coming into next year in terms of

startups that you're seeing in your pipeline or just the type of work that's being done? What do you think are some of the most significant types of Bitcoin companies are going to be in the year to come? Well, we're going to be looking at companies that benefit from the TAC group upgrade, of course. we're looking at the theme of earning and thinking about that very broadly. So, you know, I've said a few times about, I've said a few times that while most people are coming into Bitcoin today and in the years prior via investment or via diversification of their capital, in the future, most people will probably first come into Bitcoin

through earning or simple peer-to-peer exchange that is quite separate. from investment. And of course, Stillmark wants to back the best founders in those spaces and really exciting trend that I'd like to share is that there are founders, there are really incredibly talented operators and founders coming into Bitcoin not religiously, but because they see Bitcoin technologies as a way to advance their work. So, for example, we're seeing very top-level gaming executives leaving their current shop to introduce a game that they believe Bitcoin helps them accelerate. They would do it with a different blockchain or L2 technology, you know, if there was one that was better than Bitcoin. But their assessment is that there's not and that Bitcoin's

technology is, you know, more secure, more robust, more additive to the experience of introducing. And so Stillmark, of course, in addition to backing folks that are Bitcoin native wants to partner with those types of founders as well. And the fact that folks that are kind of agnostic are recognizing Bitcoin as a tool to their development of a company with significant enterprise value, I think is really, really bullish for Bitcoin, including in relative terms to other cryptocurrencies. I feel like 2022 will be simultaneously incredibly exciting for people who have been here for a while and seemingly boring, right? A greater and greater number of the announcements that will be made of adoption will be sort of not some flag planting statement, but oh yeah, they adopted Bitcoin because they needed it for XYZ reason and it's just sort of normalized now, you know? You know, I think you sound like a bitpointer when you say that.

I think that 2022 could be a massive year. So I think it could be Bitcoin and Lightning Network sort of like mic drop year in terms of making evident the breadth of utility that you can have from Bitcoin and Lightning Network. And so I'm quite bullish on 2022. Awesome. Well, let's do this more in 2022 and catch up with some more more frequency. But Elise, always wonderful to have you on the show. Always great to hear your perspective on things. And thanks again for being here.

Thank you for having me. It's pretty clear, I think, that the mic drop moment in that conversation was Elise's assertion that the thing that was so powerful about El Salvador was that when a nation state wanted to adopt Bitcoin, Bitcoin was ready. It's really easy to get lost in the details to focus on implementation issues, to focus even on really serious issues of credibility, of public sentiment, but it's still really important to recognize as we think about this from a Bitcoin evolutionary standpoint, just how well the network has performed in this context. And that's to say nothing of the other challenges that it's

faced this year, like the great hash rate migration out of China. This network was built for resilience, and that has been proven and tested over and over again. I want to say thank you to Dylan, Dan, and Elise for joining me for the gratitude for Bitcoin mini-series. And for you guys, the listeners, if you liked this, get excited because we're going to do another series of this type of short, fun, 21-minute interviews looking at the year that's been and the year to come for our end-of-year holiday coverage. So get excited for that. And for now, I appreciate you listening. And until tomorrow, be safe and take care of each other. Peace.